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GST (Goods and services tax) Te tāke hokohoko

Adjustment for change-in-use

When goods or services are acquired, a claim for input tax is allowed based on the intended taxable use of the supply.

For the first adjustment period and each subsequent adjustment period an adjustment is required when a change-in-use occurs.

Adjustment period 

An "adjustment period" is the period of time at the end of which an adjustment for a subsequent change-of-use is required, ie:

  • the first adjustment period is for a period that:
    • starts on the date of acquisition, and
    • ends on either the taxpayer's next balance date or the first balance date that falls at least 12 months after the acquisition date, as elected by the taxpayer.
  • each subsequent adjustment period is for 12 months in line with a person's annual balance date, unless a change in balance date occurs.
Example

The date of purchase is 1 February 2012 and the taxpayer has a 31 March balance date.
The taxpayer has the choice of their first adjustment period being either:

  • 1 February 2012 to 31 March 2012, or
  • 1 February 2012 to 31 March 2013.

All subsequent adjustment periods will be for 12 months from 1 April to 31 March.

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Number of adjustment periods 

There is a maximum number of adjustment periods that will apply based on the GST-exclusive bands of goods or services:

  • $5,001 to $10,000 - two adjustments periods
  • $10,001 to $500,000 - five adjustment periods
  • $500,001 or more - ten adjustment periods.
Example

For a charter boat purchased for $35,000 in May 2011, the adjustment periods are:

  • first adjustment period May 2011 to 31 March 2012 (this is elected - could have elected May 2011 to 31 March 2013)
  • second adjustment period 1 April 2013 to 31 March 2014
  • three further annual adjustment periods 1 April to 31 March, ending 31 March 2017.

Alternatively you can select the maximum number of adjustment periods by reference to the estimated useful life of an asset as specified in the tax depreciation rates determinations set by the Commissioner.

There is no limit to adjustment periods in relation to land.

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Exclusions from making an adjustment 

GST-exclusive value of $5,000 or less

No change-in-use adjustment is required for goods and services that have a GST-exclusive value of $5,000 or less.

Example

Dave purchases a flat screen TV for $2,500 and when acquired its intended taxable use was 80%. Input tax of 80% is claimed.

Because the GST-exclusive value is less than $5,000, no adjustment of change-in-use in any subsequent adjustment period is required.

GST-exclusive value of more than $5,000

A further exclusion applies where the recipient makes both taxable and exempt supplies, and the total value of exempt supplies in an adjustment period is no more than the lesser of:

  • $90,000 or
  • 5% of the total consideration for all taxable and exempt supplies for that adjustment period.

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Identifying whether there is a substantial change-in-use of goods or services 

To identify whether an adjustment is required, a comparison is made between the "percentage actual use" (calculated from the date of acquisition to the end of the relevant adjustment period) to the last intended or actual use percentage used. For example, if the intended taxable use was 65% when acquired, and at the end of the first adjustment period the actual taxable use was 75%, then a change-in-use has occurred.

No adjustment is required when the "percentage actual use" (the extent to which the goods or services are used for making taxable supplies) does not change for any adjustment period. In addition, no adjustment is required if the difference between the "percentage actual use" of goods or services and the "percentage intended use" or previous actual use is less than 10 percentage points and the monetary value of the adjustment is less than $1,000.

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Calculating the adjustment for an adjustment period 

When goods or services are acquired an input tax claim is allowed based on the percentage intended use of the supply, at the time of acquisition.

To calculate the amount of change-in-use adjustment for the adjustment period the following formula applies:

Full input tax deduction × percentage difference

Full input tax deduction is the full amount of input tax on the supply

Percentage difference is the percentage difference between the actual use and either the intended use (on acquisition) or the previous actual use.

Example

In October 2012 Peter acquires a luxury boat for $800,000 plus GST. On acquisition he estimated that the boat would be used 100% for charters (taxable purpose). As a result, a full input tax credit is claimed.

For the second adjustment period the boat was actually used 80% for taxable purposes.

Date boat acquired
Percentage intended use - 100%
Full input tax of $120,000 claimed ($800,000 × 15% equals $120,000)

First adjustment period (6 months October 2012 to 31 March 2013)
Percentage intended use - 100%
Percentage actual use - 100%
No change-in-use adjustment required

Second adjustment period (12 months 1 April 2013 to 31 March 2014)
Previous actual use - 100%
Percentage actual use over 18 months since date acquisition - 86.6%
ie, (100% × 6/18 equals 33.3) plus (80% × 12/18) equals 33.33 plus 53.33 equals 86.66%


Percentage difference 100% minus 86.66% equals 13.34%

$120,000 × 13.34% equals $16,008

In the second adjustment period the taxpayer must account for $16,008 output tax for the non-taxable use of the boat.

Note: the figures "6" and "12" represent the months in each adjustment period and "18" being the total number since the acquisition of the boat.

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Wash-up rule 

When the use of an asset to which the apportionment rules apply changes to become either 100% taxable or 100% non-taxable there must be a wash-up adjustment made.

The adjustment needs to happen when the use changes and remains unchanged for a full adjustment period even if the change is within the 10% or $1,000 threshold.

To calculate the wash-up adjustment the following calculation applies:

Full input tax deduction - actual deduction

Full input tax deduction is the total amount of input tax on the supply taking into account any nominal GST component charged on a zero-rated land transaction.

Actual deduction is the amount of deduction already claimed taking into account adjustments made already.

Note

For the provisions of section 21FB to apply the adjustment period in which the wash-up calculation is performed must fall after 30 June 2014. That is the date section 21FB became operative.

Example

In November 2012 Erin purchases a building for $1,500,000 plus GST. The building will be used for 50% commercial use (taxable) and 50% apartments (leased dwellings, non-taxable). An input deduction of 50% is claimed at the time of purchase.

In November 2013, one year after acquiring the asset, Erin decides the apartments will now be managed serviced apartments operated for business travellers. Serviced apartments are commercial dwellings, a 100% taxable use.

Erin makes the adjustment in the period the change of use occurred, to reflect the taxable and non-taxable proportion of use over her ownership period.

Date building purchased
Percentage intended use - 50%
GST input tax 15% $225,000, claimed 50% $112,500 ($225,000 × 50%)

First adjustment period (5 months November 2012 to 31 March 2013)
Percentage intended use - 50%
Percentage actual use - 50%
No change of use adjustment required ($112,500 already claimed)

Second adjustment period (12 months 1 April 2013 to 31 March 2014)
Previous actual use - 50%
Percentage actual use over 17 months since purchase - 64.70%
ie, (50% × 12/17 equals 35.29) plus (100% × 5/17 equals 29.41) 35.29 plus 29.41 equals 64.70%

Percentage difference 64.70% minus 50% equals 14.70%
Because this is more than a 10% percentage difference an adjustment is required.

$225,000 × 14.70% equals $33,075

In the second adjustment period Erin claims a further $33,075 of input tax for the taxable use of the building.

The building continues to be used as managed serviced apartments for the next 12 months. At the end of the third adjustment period, Erin now needs to do a wash-up calculation to claim back all the remaining GST charged on the building due to it now being 100% taxable use for the entire adjustment period since the change.

Wash-up third adjustment period (1 April 2014 to 31 March 2015)
Full input tax when purchased - $225,000
Actual deduction - ($112,500 plus $33,075) equals $145,575
Wash-up adjustment - $79,425

$225,000 minus $145,575 equals $79,425

In this wash-up adjustment period Erin claims a further $79,425 of input tax for the taxable use of the building.

If she didn't complete the wash-up, because Erin had a year of part non-taxable use, her proportional percentage use would never become 100% to match the current actual use of the building.

The wash-up adjustment must also be completed if the change of use moves to 100% non-taxable. If this were the case there would be output tax to pay back.

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Final adjustment on disposal 

A final adjustment on disposal will allow for any additional input tax not previously claimed.

The following formula is used in this calculation:

Tax fraction × Consideration × ( 1 minus Actual deduction )
Full input tax deduction

Tax fraction is 15% GST or the tax fraction of 3/23

Consideration is the amount of consideration received, or treated as received, for the supply.

Actual deduction is the amount of deduction already claimed, taking into account adjustments made up to the date of disposal.

The amount calculated under this formula, when added to any deductions already claimed, must not exceed the total input tax on the asset.

Example

Melissa buys a car for $46,000 (inclusive of GST $6,000). She claims 70% input tax of $4,200. The car is sold for $30,000 (GST-inclusive). Full input tax has not been claimed for the car, so a final adjustment for input tax is calculated.

  3 × $30,000 × ( 1 minus $4,200 ) equals $1,174  
23 $6,000

To calculate

Step 1. Divide 3 by 23 and $4,200 by $6,000

equals 0.1304347 × $30,000 × (1 minus 0.70 ) equals $1,174

Step 2. Calculate (1 minus 0.70) equals 0.30

Step 3. Multiply out

equals 0.1304347 × $30,000 × 0 .30 equals $1,174

The amount of the adjustment to be claimed in respect of the taxable disposal of the vehicle is $1,174.

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Special rules for concurrent use of land 

Special rules apply when land is used concurrently between taxable and non-taxable supplies. For example, an old bungalow is purchased with the intent of renovating it and selling at a profit. The renovations are completed but the property market has taken a dive so the decision is made to rent (non-taxable use) the property for a period until the property market improves and the bungalow can be sold (taxable use) for a better price.

An adjustment is made using the formula:

  Consideration for taxable supplies × 100%
Total consideration for supply

Consideration for taxable supplies is the amount derived on disposal or if not disposed of its market value at the time of adjustment

Total consideration for supply is the consideration for taxable supplies (per above) plus all rental income derived.

Find out more

You can find more information on page 38 of our Tax Information Bulletin, Vol 23 No1, February 2011.